Borrowers paid to leave mortgages early
Mortgage borrowers could have as much as £25,000 of their loans written off if they agree to move to a new lender.
Several specialist mortgage banks are so desperate to get rid of borrowers and wind down their lending operations that they are prepared to pay-off customers and help them remortgage to a new lender.
One mortgage bank, GMAC, which was the 10th largest lender in 2007 issuing £10 billion in residential and buy-to-let loans, has targeted around 400 borrowers that could potentially find a new deal if they had more of an equity stake in their homes. It is offering to reduce their loans by as much as £25,000 to help them move elsewhere, and will also waive any fees normally associated with exiting a mortgage early.
Lenders are currently restricting remortgages to borrowers with a good level of equity in their homes – known as loan to value (LTVs). By reducing borrowers' mortgage debt - which reduces the LTV at the same time - lenders like GMAC hope to make their existing customers more attractive to rival banks.
Jeff Knight, marketing director at GMAC, says: “This is currently just a pilot but we are contacting borrowers who have a good credit history and could remortgage away if their equity stakes were larger.”
So far, just one of its borrowers has successfully managed to find a new deal elsewhere, but Knight is confident that by August more of those taking part in the pilot will have benefited. GMAC stopped lending to new borrowers at the end of 2008, and is now focusing on managing its assets.
“This is good for our borrowers and good for us, as it puts us in a stronger financial position,” he explains.
Borrowers taking part in the scheme are being advised to speak to their mortgage broker to see if they could benefit from moving their loan to another lender.
Elsewhere, Bristol & West, which is part of Bank of Ireland, has offered to waive the early repayment charges (ERCs) of around 1,500 of its borrowers if they leave their current mortgage deal and move to another bank or building society.
Audrey Nolan, spokeswoman for Bristol & West, says: “Customers are being offered the opportunity to have an independent mortgage review with London & Country, which provides free, impartial advice as to the best mortgage options available in the marketplace. Customers who do not wish to take up the offer will remain with Bristol & West as normal.”
The lender stopped selling new loans through brokers in January this year.
Edeus and Advantage, two other specialist mortgage lenders which were both funded by American investment banks during the height of the mortgage market in 2007, are reportedly offering similar deals to their outstanding mortgage borrowers.
Could you save money by leaving your mortgage early?
Even borrowers who haven't been offered money to remortgage to a new lender could potentially benefit by leaving their current deals early.
Most mortgage lenders will hit you with a fee if you leave your deal within the discount period, which is normally a percentage linked to the outstanding mortgage balance. For this reason, most people wait until their discount period ends – this can be after anything from two to 25 years.
However, with new mortgage rates looking surprisingly attractive at the moment, brokers say it might be worth stumping up the fee. Ray Boulger, senior technical manager at John Charcol, says paying your lender’s ERC in order to get a cheaper rate could be viable for some borrowers, but the sums involved can be difficult.
“If you need to borrow more than 70% or 75% of your property’s value then it probably isn’t worth it as rates for people with low equity stakes aren’t competitive enough,” he adds.
How long your discount period has left to run is another important consideration.
“If you’re in the last year of your fixed rate and the ERC is a flat rate throughout the whole period, then it’s probably not worth moving,” explains Boulger.
One exception is if you are in the final year of your fixed period and your ERC decreases each year. Boulger says: “If your mortgage is relatively low then it could be worth moving even if you are in your final year – just make sure you get professional advice first.”
While it is worth speaking to a mortgage broker before you opt to leave your mortgage early, there are some simple mathematical points to consider that should give you an idea of whether it would be worth it financially.
First off, find out what the cost of your ERC will be. Then, unless you have cash to pay this to hand, add this amount to the outstanding debt on your current mortgage. This will, of course, increase the amount of interest you pay back over the term.
Calculate how much your new mortgage repayments will be and work out what the monthly saving is. Calculate how many months it will take before this monthly saving is equal to the ERC you paid.
Another important point to bear in mind is that you might have to pay additional fees to close your mortgage account, and could also face fees from your new lender. Most lenders charge an account closing fee, which can range from £125 to £250. You can find out exactly how much this will be by contacting your lender or by checking your original loan offer.
Matt Andrews, managing director of Money Workout, says: “Look at the fees your new lender will charge you – such as booking/arrangement fees. Most lenders will waive valuation and legal fees, but if not then this cost must be factored in.”
Andrews says people should first of all work out how much they would save in monthly payments over the term of the new deal. The ERC and any additional fees should then be subtracted from this figure. The number you get left with will either be a saving or a loss.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.